Economic Data Watch and Market Outlook
Global financial market and asset prices experienced outsized daily price swings (+ or -1.7% for the S&P 500), as the negative sentiment caused by a sharp spike in new COVID-19 cases in the US and Europe caused investors to de-risk their portfolios. The specter of a Fall wave for the coronavirus, prompted fears of new widespread lockdowns which would blunt the economic rebound seen since Q2. Market volatility was further exacerbated by increased uncertainty over the US Presidential election, as former Vice President Biden’s large lead in the polls has narrowed or been reversed, particularly in important background states such as Florida, Pennsylvania, Arizona, and Georgia. The S&P 500 “fear index” the VIX, rose by 40% last week to 38 on Friday. Rises in volatility were seen across several major asset classes, as the implied volatility for oil rose into the mid-60’s and the EuroCurrency Volatility Index hit a six-month high. Volatility prompted selling from hedge funds, volatility target funds, mutual funds, and momentum traders. In addition, the price movement across asset classes has seen a recent rise in correlations, as risk assets such as equities and high yield dropped in price, but typical safe havens such as gold, US Treasuries and JPY also fell.
As we enter next week’s trading sessions, we would expect market volatility to remain high. Even though the US Presidential election is finally upon us on November 3rd, with the closeness of the race and the potential effect of mail in ballots being counted days after election day, the outcome may not be known for days if not weeks. Markets will also be on watch for any further progress by the major drug companies in finalizing a COVID-19 vaccine and other treatments. Through all of the market tumult, the corporate earnings season has been overlooked. Thus far with 64% (319 companies) in the S&P 500 having reported, 86% have beaten their earnings projections, which if the percentage holds, would be the highest on record. The blended earnings for the index are showing a -9.8% decline, which is far better than the -21.2% projected at the end of Q3. This brings the forward P/E for the S&P 500 to 20.6 according to FactSet. We will see if the positive earnings will be enough to drive equity prices higher after the conclusion of the US elections
In turning to the coming week’s economic calendar, markets will be fixated on the progress the US is making on the job front, as the Non-Farm Payroll report for October will be out on Friday. But we start off on Monday with the ISM Manufacturing report for October, which is projected to rise by 1.1 points to 56.5.
The October ISM Non-manufacturing survey out on Wednesday, is estimated to have declined by 0.8 points to 57.0. The survey has rebounded sharply since the COVID-19 outbreak in Q1, but the survey is beginning to falter as fear of a new COVID-19 wave is curbing in-person consumer activity.
On Friday, the Non-Farm payroll report for October is expected to show and increase of 500,000 jobs, sending the unemployment rate down from 7.9% to 7.8%. The job growth is robust when compared to pre-COVID-19 levels, but it has moderated since the sizable recoveries seen in May and June. Hourly earnings are projected to tick up by 0.1% as the jobs market continues to rebound from very weak conditions.
The Week In Review
U.S. Equities
US equity markets suffered their worst weekly decline since March, prompted by the sharp rise in COVID-19 cases in Europe and the US, and increased uncertainty over the outcome of the US Presidential election.
- Dow Jones -6.47% MTD -4.52% YTD -5.38%
- S&P 500 -5.62% MTD -2.66% YTD +2.77%
- Russell 2000 -6.21% MTD +2.09% YTD -6.77%
Drivers: I) Real GDP for Q3 soared higher by a record 33.1% annual rate. The sharp rebound brings US GDP to a level that is still 3.5% below the peak seen in Q4 2019, as the collapse in US economic growth caused by the COVID-19 pandemic shutdown, has yet to be fully recovered. The re-opening of the economy led to an outsized jump in real consumer spending which increased at a 40.7% rate, led by the purchase of durable goods.
II) For September, New Single-Family home sales declined by 3.5% to 959,000 units on a seasonally adjusted annual rate. The new home sales data came in below expectations, but the sales increase in Q3 was quite strong compared to the depressed sales levels seen in Q2. While the housing data has been uneven, the sector should remain strong as mortgage rates remain at historical lows and pent-up demand still exists.
III) In September, real Consumer Spending rose by a solid 1.2%, which exceeded Street estimates. Consumer spending has remained strong, boosted by the CARES Act stimulus package that provided $1,200 stimulus checks and increases in unemployment benefits. The concern is spending may drop off in Q4 due to the lack of further stimulus and the spread of COVID-19 due to falling temperatures.
IV) The Personal Consumption Expenditures (PCE) Price index in September supported the premise that inflation continues to remain tame. The COVID-19 pandemic and the subsequent economic lock-down in the US has caused a decline in inflation rates. In September, the PCE Price index rose by only 0.16% or at a 1.4% year over year rate, while the core PCE Price Index increased by 0.18% or at a muted 1.5% year over year.
V) Equities Month to Date are lower with Small-Cap, Value, Utilities, and Communication Services leading equity price performance. The laggards for the period are Large-Cap, Growth, Technology and Energy.
Capitalization: Large Caps -2.41% (YTD +3.83%), Mid-Caps +0.64% (YTD -1.72%) and Small Caps +2.09% (YTD -6.77%). Style: Value +3.53% (YTD -17.63%) and Growth +1.30% (YTD -0.03%). Sector Groups: Technology -5.11% (YTD +22.00%), Information Technology -4.75% (YTD +20.85%), Consumer Discretionary -2.73% (YTD +15.05%), Communication Services +0.74% (YTD +9.91%), Materials -0.72% (YTD +4.56%), Healthcare -3.68% (YTD +1.09%), Consumer Staples -2.97% (YTD +0.76%), Utilities +5.02% (YTD -0.89%), Industrials -1.44% (YTD -5.38%), REITs -3.32% (YTD -9.89%), Financials -0.82% (YTD -20.82%) and Energy -4.28% (YTD -49.64%).
European Equities
The MSCI Europe Index was down sharply on the week, as the increase in new COVID-19 cases led to new lockdowns in the UK, France, and Germany, raising concerns over the economic growth outlook.
Drivers: I) Euro-zone Q3 GDP growth climbed by 56.0% which was well above the consensus estimate of 44.0% on an annual basis. The rebound comes after the sizable declines seen in Q1 of -14.1% and -39.5% on an annual basis. The recovery still leaves GDP about 4.3% below the level seen in Q4 2019. The report shows activity jumped after virus implemented restrictions were eased, and despite consumer and corporate uncertainty.
II) The ECB last week setup its agenda for the December meeting for a “recalibration” of its policy tools, to support the recent economic recovery from the COVID-19 induced recession. The goal of the ECB is to ensure that financial conditions remain favorable to support growth, and to combat the negative effects of the pandemic on inflation. President Lagarde stated all policy tools would be considered to help the economy.
III) Performance of European Indexes for the week, month-to-date and year to-date. The MSCI Europe Index was lower by -6.99% for the week (MTD -5.64% YTD -13.99%).
Asian Equities
Asian equity markets were lower as investors awaited the outcome of the US Presidential election, and clues as to the next rounds of stimulus for the US and the Euro-zone. The DJ Asia Index declined by -2.03% for the week, (MTD +0.81% YTD -6.23%).
Drivers: I) In Japan, September’s Industrial Production release showed an increase of 4.0% m/m, which was above the consensus estimate of a 2.8% rise. Industrial production activity has seen an improvement for four consecutive months, but September’s result still leaves production about 7.9% below the pre-COVID 19 level in February. Improvements have been supported an increases in exports and factory shipments.
II) Industrial profits in China for September posted a solid gain of 10.1% on an annual basis. For the first three quarters of 2020, industrial profits has fallen by -2.4% annualized, an improvement from the -4,4% rate seen from January to August. Profit growth is slowing according to the NBS due to rising materials, sales and marketing costs in the electronics and auto industries.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -2.28% (MTD -0.88% YTD -1.13%), the Hang Seng Index was lower by -3.29% (MTD +2.73% YTD -14.10%) and the Shanghai Composite declined by -1.63% (MTD +0.20% YTD +5.72%).
Fixed Income
Treasury yields rose despite the decline in global risk assets, as investors pre-positioned their bond holdings for a potential blue wave outcome for the US election, which could sharply increase government spending.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.879% up from 0.842%. The 30-year yield rose last week finishing at 1.664% climbing higher from 1.643%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.04% last week, MTD -0.45% and YTD +6.32%. The Bloomberg Barclays US MBS TR was higher at +0.06% last week, MTD -0.04% and YTD +3.58%. The Bloomberg Barclay’s US Corporate HY Index dropped lower by -1.05% for the week, MTD +0.51% and YTD +1.13%.
Commodities
The DJ Commodity Index declined last week by -3.68% but is up month to date +0.51% (YTD -1.93%). Commodity prices dropped last week as the increase in COVID-19 and new lockdowns in Europe could stunt the global economic recovery, and demand for commodities such as oil and industrial metals.
Performance: I) The price of oil plunged last week by -10.21% to close at $35.72 and is lower month to date by -11.19% (YTD -41.50%). Oil prices dropped to a five-month low, as the increase in COVID-19 cases in the US and Europe could sharply lower demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +1.22% ending at 93.88 for the week (MTD -0.01% YTD -2.60%). The USD rallied last week, as the rise in global COVID-19 cases, uncertainty over the US Presidential election outcome and drop in risk assets prompted a safe haven bid for the USD.
III) Gold declined last week, as reports regarding the rise in global COVID-19 cases caused a rise in rates and the USD, which is are negative for gold prices. Gold fell in price by -1.29% last week, declining to $1878.8 (MTD -0.88% YTD +23.35%).
Hedge Funds
Hedge fund returns in October are mostly negative with the core strategies Equity Hedge, Event Driven, Macro/CTA lower ,while Relative Value and Multi-Strategy positive for the month.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.06% MTD and up +1.56% YTD.
- Equity Hedge has declined by -0.34% MTD and is lower by -3.28% YTD.
- Event Driven is down MTD -0.14% and is up YTD +4.43%.
- Macro/CTA has fallen by -0.11% MTD and flat at +0.00%
- Relative Value Arbitrage is higher by +0.42% and is up +4.60% YTD.
- Multi-Strategy is up MTD by +0.43% and has risen by +4.18% YTD
Data Source: Haver Economics
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